Minimum Finance Charge: What It Is, How It Works, Example

What Is a Minimum Finance Charge?

A minimum finance charge is a fee that credit card holders may have to pay if the interest due on their outstanding balance falls below a certain amount. Minimum finance charges are often $1, but sometimes as low as 50 cents, and only apply when a borrower has a small balance.

Key Takeaways

• Minimum finance charges apply when the interest a credit card holder owes on their outstanding balance falls below a certain amount.
• Monthly minimum finance charges are often $1 or less.
• They are seldom charged because borrowers usually owe more than the minimum.
• The credit card agreement details all charges associated with the card.

How Minimum Finance Charges Work

Not every credit card imposes a minimum monthly finance charge. Those that do will list it on the cardholder’s statement. Cards with a special introductory interest rate often waive this fee until the introductory period ends.

Minimum Finance Charge Example

For instance, a credit card user with a 20% annual interest rate on their outstanding balance would pay a $1 minimum finance charge only if their balance was $60 or less at the end of the monthly billing cycle.

Minimum Finance Charge vs. Minimum Monthly Payment

A minimum finance charge is not the same as a minimum monthly payment.

The minimum monthly payment is the smallest amount the cardholder is required to pay the card issuer that month. Otherwise, the account will be subject to late fees and considered delinquent. This can negatively affect the individual’s credit score, making it more difficult and costly to obtain other credit in the future.

Minimum monthly payments are typically a percentage of the outstanding balance, such as 1% to 4%, but sometimes flat fees.

Credit card issuers must show on the billing statement how long it will take to pay off the balance if only the minimum payment is made each month.

Minimum Finance Charges and Other Fees

Credit cards can come with a long list of fees, and the minimum finance charge may be the least significant.

The most common fees include:

• Annual fees
• Late fees
• Over-limit fees
• Cash advance fees
• Balance transfer fees
• Foreign transaction fees

By shopping around, you can find credit cards without certain fees or with low fees in certain categories. However, a card with low or no fees in certain categories may have higher fees in others.

All fees and charges, including the minimum finance charge, are detailed in the cardholder’s credit agreement.

How Can You Find Your Credit Card Agreement?

If you didn’t save the credit card agreement provided by your card issuer, you can obtain it easily. Many issuers post their credit card agreements online, or you can call your bank or issuer to request a copy.

Can a Credit Card Issuer Change the Terms of Your Credit Agreement?

Credit card issuers have the right to change the terms of your credit card agreement. For significant changes, the issuer must give you 45 days’ notice. These changes typically involve increases in interest rates and fees, increases to the minimum amount due, or changes to the grace period or the way interest is calculated. Review any mail from your credit card company to stay informed.

Will Carrying a Low Balance on Your Credit Card Affect Your Credit Score?

Paying credit bills on time each month is the most important factor in building and maintaining a strong credit score. It’s generally recommended to keep outstanding balances as low as possible. Credit scoring formulas consider the amount of debt outstanding as a percentage of all available credit, known as the credit utilization ratio. Cardholders should aim to keep this percentage below 30%.

The Bottom Line

The minimum finance charge is often irrelevant for people with significant balances or those who pay their balance off in full each month. There are other credit card fees that are worth paying more attention to—and trying to avoid if possible.